Finland may pay citizens just for being Finns

by
WP |
04 Nov 2015

(Bloomberg View) -- An official at the Finnish Social Insurance Institution, known as KELA, said last week that each Finn could receive 800 euros ($876) a month, tax free, that would replace existing benefits. Full implementation would be preceded by a pilot stage, during which the basic income payout would be 550 euros and some benefits would remain.

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KELA will present a proposal by November 2016, but for now the idea sounds unrealistic. Finland has one of the European Union's shakier economies. It has been in recession almost continually since mid-2012 and lacks growth opportunities. The traditionally strong pulp and paper industry is in decline and the tech sector hasn't lived up to expectations after Nokia lost its place as the mobile-phone market leader. Giving 800 euros a month to every Finn (the population is 5.4 million) would cost 52.2 billion euros a year, and the government projects revenue of 49.1 billion euros for 2016.

Even wealthier Switzerland, which will hold a referendum on a basic income program next year, is unlikely to adopt the idea because of the expense. The proposal to pay each citizen about $2,500 a month would cost about $210 billion a year, or 30 percent of gross domestic product. The Swiss federal government and the parliament have called on citizens to reject it. According to a recent poll, 49 percent of the voters support a universal basic income, but to achieve a majority, the allowance would have to be smaller than proposed.

Finland, however, may go through with its plan, perhaps moving ahead of the the Netherlands, where universal income pilot projects will begin next year in Utrecht and possibly in several other cities. The reason for the project's good prospects in Finland: a political consensus that it is necessary.

Earlier this year, Helmuth Cremer of the Toulouse School of Economics in France and Kerstin Roeder of the University of Augsburg in Germany showed that modern democracies are far more likely to adopt a means-tested social security system than a universal basic income. Giving away taxpayers' money to people whether they work or not is not a popular notion.

The Finns are different. In a recent poll commissioned by KELA, 69 percent said that they would support a basic income plan and that about 1,000 euros a month would be the appropriate amount. There is broad support for the idea across political parties and Prime Minister Juha Sipila favors the idea as a way to simplify the welfare system. The poll showed there was especially high backing for a basic income implemented as a negative income tax. Such an arrangement, which was initially proposed by Milton Friedman and Robert Lampman, would provide payments from the state that would increase in inverse proportion to income.

U.S. experiments in the 1960s showed that a negative tax wouldn't work "as long as the median income remains within striking distance of the poverty line." In Finland, the median income is about 3,000 euros a month, far more than KELA's 800 euro target. But it also is a country where some people pay more than 50 percent tax on incomes of 70,000 euros a year, and there may be a greater acceptance of further redistribution, especially if it means more security. A jump in the unemployment rate to 11 percent earlier this year (it is 8.4 percent now) raised alarm in Finland, possibly making a basic income even more appealing. One draw is that giving all citizens the same benefits would remove the stigma attached to joblessness.

Many experiments have shown that people provided with a basic income don't lead idle lives. A study conducted in Uganda indicated that people given such assistance invest in their personal development and end up in more qualified positions, working longer hours and earning more than those who don't have a safety net. In wealthier countries, people slightly reduce the amount of time they spend at work. The extra time is often spent with children, on personal development or healthy activities.

There probably isn't much danger that Finns will stop working if they get a basic income. The bigger risk is that the government won't be able to pay for it.